Edited version of private advice

Authorisation Number: 1052176602794

Date of advice: 6 October 2023

Ruling

Subject: Eligible termination payment - settlement payment

Question 1

Is the payment made to you under a deed of release assessable as an employment termination payment as defined in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is any capital gain from the payment reduced to nil in accordance with section 118-20 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period

Income year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

You were employed by your former employer.

You and your former employer were involved in a general dispute in relation to your employment.

You made a claim for damages, including for hurt, humiliation and distress caused by your alleged discrimination from the employer.

This dispute resulted in your employment ceasing, subject to the terms of the deed of release ('the deed').

Under the deed, you received a payment which was classified as general damages.

As part of the conditions for payment, you agreed to immediately resign from your employment.

In signing the deed, you released the employer from any future claims against them and acknowledged there was no admission of liability on the part of the employer.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 118-20

Income Tax Assessment Act 1997 Section 118-22

Income Tax Assessment Act 1997 Section 118-37

Reasons for decision

Question 1

Summary

The payment made to you under a deed of release is assessable as an employment termination payment.

Detailed reasoning

Employment termination payment

An employment termination payment (ETP), where the payment is made during the life of a taxpayer, is known as a life benefit termination payment (subsection 82-130(2) of the ITAA 1997).

Section 995-1 of the ITAA 1997 states that:

employment termination payment has the meaning given by section 82-130 of the ITAA 1997.

Subsection 82-130(1) of the ITAA 1997 states that:

A payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

(ii) after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

In order for the payment made to you under the deed to constitute an ETP, all the conditions in section 82-130 of the ITAA 1997 will need to be satisfied.

Failure to satisfy any of the conditions will result in the payment not being considered an employment termination payment. Furthermore, any termination payments received outside of the 12 months are taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12-month rule.

Payment is made in consequence of the termination of employment

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Taking into account the courts' decisions on the meaning of the phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are set out in Taxation Ruling 2003/13 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13).

Paragraphs 5 and 6 of TR 2003/13 state that:

5....the Commissioner considers that a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

6. The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

At paragraph 32 of TR 2003/13 the Commissioner considers payments from a former employer to settle litigation:

32. The Federal Court in Dibb v. FC of T adopted the approach of Goldberg J in Le Grand. At issue was whether a payment received by the taxpayer under a deed of release, following the settlement of Federal Court proceedings against his former employer, was an ETP. In deciding the payment was an ETP, Heery J held that the length of time between the termination of employment, the commencement of court proceedings and payment following settlement did not sever the causal connection between the termination and the payment. It was sufficient that the subject matter of the litigation was the termination. Heery J found at 296 that:

'The various causes of action whether breach of contract, conspiracy, breach of fiduciary duty or contravention of the Trade Practices Act were, as Goldberg J would say (Le Grand at [36]), 'interwoven and intertwined' with the termination. The payment was a consequence of the settlement, which was a consequence of the Federal Court proceeding, which in turn was a consequence of the termination.'

The payments in these cases were ETPs because there was a sequence of connected events following the termination which ultimately led to the payment. The payments would not have been made but for the termination.

From the facts provided in this case, your employment with your former employer was terminated during 2023 as set out in the deed of release.

It has been argued that the payment of general damages was not received in consequence of the termination of your employment, but rather that it was received in consequence of unlawful discrimination against you, by your former employer.

However, as you have stated, you sought to settle the claim by signing the deed, rather than engaging in lengthy and costly legal proceedings in relation to your claim under the Anti-Discrimination Act.

In signing the deed, you agreed that, as part of your obligations in order to be entitled to the payment, you would submit a letter of resignation, resigning from your employment with immediate effect.

It is clear that had you continued on with your employment, you would not have been entitled to the payment.

As such, the payment for general damages, along with the rest of the payment, would not have been made, had there been no termination of employment. The termination of employment and the payment are intertwined and connected. The payment is considered to be received by you in consequence of the termination of your employment, as it resulted from you resigning from your employment. Therefore, the requirement of subparagraph 82-130(1)(a)(i) of ITAA 1997 has been met.

Payment received more than 12 months after termination

Paragraph 82-130(1)(b) of the ITAA 1997 requires that the payment must be received no later than 12 months after the termination of employment.

In this case, your employment with your former employer terminated during 2023. The payment was made to you soon after in the 2023 income year. This is consistent with the requirements of the deed, which required the employer to make payment within 14 days of the exchange of the executed deed. Therefore, the requirement under paragraph 82-130(1)(b) of the ITAA 1997 is satisfied.

Not a payment mentioned in section 82-135 of the ITAA 1997

Section 82-135 of the ITAA 1997 provides that certain payments are not ETPs, including:

•         unused annual leave and unused long service leave payments

•         genuine redundancy and early retirement scheme payments up to the tax-free limit

•         capital payments for personal injury as compensation for your inability to be employed.

In Re Luke and Federal Commissioner of Taxation [2011] AATA 801; (2011) 2011 ATC 10-216; the Administrative Appeals Tribunal (AAT) accepted that the taxpayer had been adversely affected by what they perceived to be unreasonable harassment and discrimination in their employment, but said that 'personal injury' does not extend 'beyond physical injury and mental illness to include emotional hurt'. The AAT added that:

Evidence is required that the payment had some form of identifiable and unambiguous connection with a personal injury, for which compensation was necessary as a reflection of the fact that the applicant's capacity to derive income from personal exertion had been impaired.

In view of the above, a physical and/or mental injury would require diagnosis by a qualified medical practitioner to fall within the meaning of 'personal injury'. The payment must also be calculated by reference to the nature of the injury and the extent to which the injury will affect your capacity to derive income from employment.

Although the settlement payment relates to your claim for damages, including the hurt, humiliation and distress caused by the discrimination, it is clear that the calculation of the payment of general damages contains no reference to the nature of any injury, nor the extent to which such an injury may affect the capacity to derive income from employment.

Furthermore, the wording of the deed makes it clear that the employer admitted no liability, and that you released and indemnified the employer against any future claims.

As the payment is not of a type mentioned in section 82-135 of the ITAA 1997, all of the conditions under subsection 82-130(1) of the ITAA 1997 have been satisfied.

Conclusion

The payment from your former employer in settlement of litigation proceedings is an ETP in accordance with section 82-130 of the ITAA 1997.

Question 2

Detailed reasoning

Capital gains tax (CGT) event C2 happens if your ownership of an intangible CGT asset ends by the asset being released, discharged, or satisfied (paragraph 104-25(1)(b) of the ITAA 1997). A CGT asset is a legal or equitable right that is not property (paragraph 108-5(1)(b)).

In your case, the payment arose out of a claim for damages for unlawful discrimination. As such, you acquired a right to receive a payment under the terms of your employment.

When the payment was made this right was released, discharged, or satisfied; and CGT event C2 happened. As such the lump sum received is a capital payment.

Section 118-20 of the ITAA 1997 recognises that a capital gain you make from a CGT event is reduced if, because of the event, a provision of the ITAA 1997 includes an amount in your assessable income for any income year. Section 118-22 treats an ETP that you receive as being included in your assessable income. As such, any capital gain you made will be reduced to zero.

As any capital gain you made in your case will be reduced to zero, under the anti-overlap provisions, it is not necessary to consider the exemption in section 118-37 of the ITAA 1997 for compensation or damages you receive for any wrong or injury you suffer in your occupation.